YouTube Search Ads: A $1 Billion Business?

We think Google's new YouTube search business could earn the company around $1 billion per year, which is about 5% of Google's total business -- not much considering the massive cost of hosting all those videos.

Update: We remembered YouTube's international traffic, and pushed our estimate from $350 million to $1 billion.

ComScore says YouTube served 8.8 billion worldwide searches in September, and queries are growing at a rate of about 38% per year. So YouTube will serve about 145 billion searches in the next twelve months.

We don't know what percentage of searches YouTube will display ads against, but for Google it was 45.5% in March 2008. Assuming the same ratio, YouTube would serve ads against about 65 billion queries.

A $.0165 revenue per search against 65 billion searches is about $1 billion of revenue.

Some important caveats:

Right now, YouTube video search advertisers cannot embed or link to videos hosted off YouTube. Blinkx does not restrict advertisers in this way, so its revenue per search is likely inflated by media companies looking for traffic on keywords such as "election night" or "playoffs." Obviously, we think Google should drop this restriction immediately.

YouTube will probably not serve ads against 45.5% of its searches in the first year, considering that the service is so new.

Even if YouTube video search ads only generate half of our $1 billion estimate per year, it's still impressive that the company could in a single stroke multiply its its revenues way above the $90 million to $150 million observers predicted YouTube would earn in 2008.